While we all want to see children receive toys at Christmas, many people want to balance this with a gift that will last long after Christmas Day. Particularly, in these times of austerity parents and grandchildren are more likely to be giving children cash at Christmas, rather than toys which are often lost or broken by March.
According to recent research by YouGov SixthSense, 29 per cent of people who save or invest on behalf of children normally do so at Christmas time.
The first choice for Christmas cash is a children’s savings account. The best deal for children’s savings according to Moneyfacts.co.uk is the 6 per cent fixed 12-month bond from Halifax. However, you have to put money aside on a monthly basis over the term (between £10 and £100 a month), so it will not be suitable for Christmas cash only.
Virgin Money and Lloyds TSB both offer 3 per cent on instant access accounts for children putting in as little as £1. However, the Lloyds TSB account is a linked product - an eligible adult must have a Lloyds TSB current account, plus it can only be operated via branches.
Taxing issues for parents
Children are entitled to income tax allowances in the same way as adults, so depending on their 'income' they may or may not be taxpayers. If a child is eligible to receive savings interest free of tax, their account can be registered for gross interest with HMRC Form R85. Parents or guardians will have to do this for children under 16.
However, if money given by a parent produces interest of more than £100 a year, the interest will be treated as the income of the parent for tax purposes. This rule does not apply to money given by others, including grandparents.
Longer-term savings ideas
If your child is old enough to understand the need for the money to be put away for the long term (longer than five years), or if you have money that you simply want to stash away for the child to benefit from in adulthood, then make sure that it is invested in equities and preferably in a tax efficient wrapper such as an individual savings account (Isa) or even a pension.
Longer-term investments can be held tax-efficiently within a junior individual savings account, or its predecessor, the child trust fund, into which family members can put up to £3,600 a year and money grows free of tax. However, you cannot access either of these until the child is 18, when the child gets full control of the funds.
If you use your own Isa allowance, you can give the savings to the child when you want rather than automatically when they turn 18.
For an ultimate long-lasting legacy (grandparents might like the idea of this) you can put £2,880 a year into a pension (such as a self-invested personal pension) on behalf of a child, which when topped up with tax relief becomes a gross contribution of £3,600. However, under current pension rules the child will not be able to access this until he or she is at least age 55.
Even if you can afford to set your children up for life there is a danger in making things too easy for them. The best Christmas gift for children is teaching them the value of money.
If you have an educational bent, the savings account is the best (for younger children especially), as it can help a child learn a simple money lesson - put your cash in the bank and it’ll grow. To reinforce the savings habit, go to the bank two to three times a year with your child to deposit savings into his or her account, and look at how much bigger the balance is on each visit.
You can also try using a system of different pots for Christmas money. Find two jars (or cans) and label one for saving and one for spending.
Suggest that your child put some of the money she gets into the saving jar, so she can buy a toy or treat when she has saved enough. Have your child set a goal to buy something she wants, and have her work toward that amount. Encourage your child to always save 10 per cent of the money she gets. You could consider a 'matching plan' for your child's savings: You put in 25p for every pound she saves.